NICOSIA, March 20 Cyprus overwhelmingly rejected
a proposed levy on bank deposits as a condition for a European
bailout on Tuesday, throwing international efforts to rescue the
latest casualty of the euro zone debt crisis into disarray.

The vote in the tiny legislature was a stunning setback for
the 17-nation currency bloc, angering European partners and
raising fears the crisis could spread; lawmakers in Greece,
Portugal, Ireland, Spain and Italy have all accepted austerity
measures over the last three years to secure European aid.

With hundreds of demonstrators outside the parliament
chanting "They're drinking our blood", the ruling party
abstained and 36 other lawmakers voted unanimously to reject the
bill, bringing the Mediterranean island, one of the smallest
European states, to the brink of financial meltdown.

Finance Minister Michael Sarris had already headed to
Moscow, amid speculation Russia could offer assistance given the
high level of Russian deposits in Cypriot banks. President Nicos
Anastasiades, barely a month in office, spoke by phone with
Russian President Vladimir Putin after the vote.

Anastasiades was due to meet party leaders at 9 a.m. (0700
GMT) on Wednesday to explore a way forward.

"The voice of the people was heard," 65-year-old pensioner
Andreas Miltiadou said among a crowd of demonstrators jubilant
after the vote.

EU countries had warned they would withhold 10 billion euros
($13 billion) in bailout loans unless depositors in Cyprus,
including small savers, shared the cost of the rescue, an
unprecedented step in the stubborn debt crisis.

The European Central Bank had threatened to end emergency
lending assistance for teetering Cypriot banks, which were hard
hit by the financial crisis in neighbouring Greece.

The island's partners barely disguised their anger.

Euro zone paymaster Germany, facing an election this year
and increasingly frustrated with the mounting cost of bailing
out its southern partners, said Cyprus had no one to blame but
itself for the gravity of the situation.

DEBTS TOO HIGH

"Cyprus requested an aid programme," German Finance Minister
Wolfgang Schaeuble told ZDF television. "For an aid programme we
need a calculable way for Cyprus to be able to return to the
financial markets. For that, Cyprus's debts are too high."

Dutch Finance Minister Jeroen Dijsselbloem, who chairs the
Eurogroup of finance ministers, said the bailout offer still
stood providing the conditions were met. European Central Bank
Governing Council member Ewald Nowotny called on Cyprus to show
"discipline and the readiness to act rationally."

But it was Europe's demand at the weekend that Cyprus break
with previous EU practice and impose a levy on bank accounts
that led outraged Cypriots to empty bank cash machines and
unsettled financial markets.

An important issue in negotiations has been the high level
of deposits held in the island's banks by non-EU citizens and
companies, notably from Russia, where Cyprus has established
itself as a major provider of offshore financial services.

BACKLASH

The EU and International Monetary Fund are demanding Cyprus
raise 5.8 billion euros from bank depositors to secure the
bailout it needs to rescue its financial sector. They say a
bailout of more than 10 billion euros would tip Cyprus's debt
level into unmanageable territory for its 1.1 million people.

But lawmakers said the levy on deposits crossed a red line.

"You can't take a 10,000-metre jump without a parachute. And
that's what they're asking of us," said George Perdikis of the
Greens Party.

International market reaction has been muted so far but that
might change.

While Brussels has emphasised that the measure was a one-off
for a country that accounts for just 0.2 percent of European
output, fears have grown that savers in other, larger European
countries might be spurred to withdraw funds.

Dijsselbloem, the Eurogroup chair, said there would be no
need to impose a levy in any of the 16 other euro countries.

Some Cypriots hope they can get aid from Russia, which has
bailed out Cyprus in the past. Many Russians keep their money in
Cyprus and operate businesses from there.

Russian authorities have denied that the Kremlin might offer
more money, possibly in return for a future stake in Cyprus's
large but as yet undeveloped offshore gas reserves, which have
raised the island's strategic importance.

An influx of Russian money and influence since the collapse
of the Soviet Union has led some Brussels officials to complain
privately that Cyprus acts at times as a "Trojan donkey" for
Moscow inside the European Union since it joined in 2004.

Banks in Cyprus are to remain shut on Wednesday to avoid a
bank run. The island's stock exchange will also be closed on
Wednesday.

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